The government has decided that intangible benefits such as social, environmental, and network effects of such projects should be given weighting to facilitate more investments in connectivity projects aimed at remote, backward and hilly areas where building large infrastructures such as railways did not make economic sense.
As a result of the policy change, the government has the necessary leeway to justify the construction of new lines, gauge conversions, doublings of lines, etc, even if they do not necessarily generate financial returns. This will also make it easier for Railways to obtain financing for these projects.
A set of four new project proposals have been submitted to the NITI Aayog by the Ministry of Railways, justifying their investment based on this new model of ‘Modified Economic Internal Rate of Return. These include the 30 km new line between Kalyan and Murbad, the 300 km new line between Jalna and Jalgaon, the doubling of the 98 km Ankai-Aurangabad line, and the 100 km new line between Sabarmati and Sarkej-Dholera in Gujarat.
The Niti Aayog considers projects that require an investment of greater than Rs 500 crore. Several more projects will be undertaken on the basis of this concept in the future, according to a spokesperson for the Railway Ministry. The Indian Railways has allocated Rs 67,000 crore for new lines, gauge conversions, and doubling of lines in the current financial year 2022-23.
Historically, railways have been able to justify new projects if they offered a minimum internal rate of return of around 12 percent. The cost of the project, the duration of the project, the maintenance requirements, and future prospects are considered. A proposed new-line project can obtain a sanction under the ‘Modified Economic Internal Rate of Return’ model even if its financial return is weak, even 2-4 percent, simply by being “socially desirable” even if it is not financially feasible.
Project network effects
Railways generally consider projects with an internal rate of return of 12 percent or greater. It is important to note that some projects may not be financially viable. Still, they may be justified by benefits that are not immediately apparent, such as social, environmental, or network effects. Such projects will get a boost with the new policy.
Rail has adapted the methodology for calculating the economic return from Metro projects, according to a senior official. A capital-intensive system like Metro can justify many of its corridor projects using similar methods of project appraisal.
It is logical that assessing the financial returns of a project, such as connecting to a port or mine, is straightforward. However, projects that connect backward areas and distant places will also have long-term effects on the economy, and these intangible benefits must also be considered, according to the official.
Using the toolkit developed by the Railway Ministry, the project assessment must address questions such as savings in travel time, reductions in road stress, increased safety, fuel savings overall for the country, reductions in vehicle operating costs, reductions in pollution, and the like as part of the project assessment.
The document was finalized following the report of a multi-disciplinary committee established within Railways to devise a comprehensive project appraisal methodology. The proposals are also expected to assess other benefits, such as the project’s impact on the social and environmental environment and on the modal share of the commodity or passengers.